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Industry Analysis: Information Services
The Information Services Industry encompasses a somewhat diverse population of companies. Still, there is a common theme in that these companies provide valuable and practical information to end-users. (Services are billed either on a subscription or per-use basis.) End-users range from small businesses to large corporations, with the mix favoring the latter. Service providers often cater to specific markets. Most equities in the industry carry beta coefficients fairly close to 1.00, indicating that they typically perform in line with the broader stock market. With a few exceptions, these issues pay a very modest dividend, if any.
This industry is generally cyclical. Notable end-markets served that are the most dependent on the macroeconomic cycle are commercial real estate, advertising, retail, high-tech, energy and engineering. Areas that are a bit less cyclical include consumer credit, business information, information technology, financial services, and economic analysis. Legal, tax accounting, healthcare and education are among those sectors having the greatest stability. In most cases, the performance of a business line is closely linked to corporate customers' budgets. During stressful economic periods, clients may move more information functions in-house. Service companies can protect against this risk by securing as many long-term contracts as possible. Government business also helps to smooth the effects of the broader market cycle.
The Operating Structure
Business models of Information Services companies tend to be similar. These companies do not provide physical products. Therefore, there are no figures for inventory or cost of goods in the traditional sense. Capital budgets are limited to investment in systems and technology; outlays for real estate and machinery are not significant.
A database is an important resource for many service providers. Managements need to ensure that compiled information is up-to-date and relevant to the end user. Frequent revisions to the database are essential and costly. Also, the speed and quality of the interface between the database and the customer are crucial to success. Industry leaders utilize the most advanced information technology available. At times, competition can be fierce.
Besides suppliers of database information, the industry includes companies that offer consulting. Such services require a highly skilled workforce. Consultants come from top colleges and universities or have significant real-world experience. Salaries can be high, and companies need to charge customers enough to earn a profit. When the corporate sector of the economy is healthy, it's not hard to maintain good profitability, but during difficult times, managements must optimize employee utilization and contain compensation to support the bottom line.
In addition to compensation paid to consultants, marketing outlays account for a substantial portion of a company's operating budget. Much of these outlays go to pay sales representatives. Salespeople are typically assigned to a particular segment of the customer base, which may consist of several small businesses or one large corporate client. Representatives must prove adept at bringing in new customers, while meeting the needs of existing ones. Effective managers closely monitor the productivity of individuals and the entire sales force on a regular basis.
The industry's debt burden, as a whole, is usually less than one-third of total capital. But there are several companies with few or no long-term obligations, and some with substantial borrowings. Consulting firms, relying mainly on brainpower, are not capital intensive, and thus only require short-term funding to finance new projects or small acquisitions. Companies that maintain big databases, develop expansive information technology systems, and/or pursue large acquisitions often carry heavy debt loads. These service providers need to increase free cash flow to service and pay down their debt.
Beyond the initial public offering of common stock, equity financing is not as crucial as cash and debt are to funding operations and expansion. (Secondary offerings are made when share prices are especially attractive.) Still, stock options are a key incentive to managers and employees (salespeople, consultants). Unchecked, options can measurably boost common shares outstanding and dilute stockholder value. Companies in the industry take care to limit the overall float via regular buybacks. The percentage of a company's exercisable options is worth noting.
Those who succeed in this industry are able to keep pace with changing practices in the workplace, new information, and advances in systems and technology. Too, they must hold on to a skilled cadre of consultants, salespeople and technicians. Competition tends to be rather stiff. Capital barriers to entry are not all that high. Still, it can often be a challenge to secure top talent. The business arena and company standings may quickly change when new players come on the field or the established line-up consolidates or acquires smaller entities.
Information Services Industry stocks have historically kept pace with the broader market averages, with some better weathering market downturns than others, depending on the end-users served. The sector's Earnings Predictability scores are generally above average. Share Price Growth Persistence ratings are more varied, according to individual company operating performance. More often than not, long-term buy-and-hold investors are likely to be satisfied with this industry.